BU - Financial Statements & more

Question 1

Balance Sheet Facts

Answer 1

FOOTNOTES FOOTNOTES FOOTNOTES

-AKA Statement of Financial Position.
-Prepared at a point in time, “snapshot” on that date
-Items on personal balance sheets are reported at fair market value (FMV).
-Items on corporate balance sheets are reported at the lower of cost or FMV.

• Balance sheet equation: Assets = Liabilities + Net Worth

-Every asset of the balance sheet is a source for risk management.
-Assets are listed on the left side of the balance sheet, listed in order of liquidity
-Liabilities and net worth are listed on the right side
-Short-term liabilities are listed and subtotaled on top, then longer term liabilities are listed and subtotaled below short-term.
-Net worth is listed below long-term liabilities.
-Total liabilities = short-term + long-term liabilities

Question 2

Statement of Cash Flow Facts

Answer 2

FOOTNOTES FOOTNOTES FOOTNOTES

-Reports cash inflow and outflows during reporting period
-Assists in reconciling ending cash from prior year with ending cash during reported period
-break cash into sources and uses
-Provides detail on whether cash was obtained from earning, investments, loan or gifts

Question 3

Balance Sheet & Cash Flow
Time
Purpose
Measures
Starting Point
Ending Point

Answer 3

Balance Sheet:
Time: at a point in time
Purpose: financial position
Measures: assets, liabilities, shareholder equity
Starting Point: cash balance
Ending Point: retained earnings

Cash Flow:
Time: Period of Time
Purpose: Cash movements
Measures: increases and decreases in cash
Starting Point: Net income
Ending Point: cash balance

Question 4

Four Basic types of financial ratios:

Answer 4

Liquidity ratios - ability to meet short term obligations
Activity ratios - relative efficiency of financial management
Profitability ratios - measure relative profitability
Debt ratios - ability to meet long term obligations

Question 5

**Liquidity ratios (3)

Answer 5

Current ratio = Current assets/current liabilities

Quick Ratio= (Current assets - inventories)/current liabilities

Working capital = current assets - current liabilities

Question 6

Activity ratios (4)

Answer 6

Inventory turnover= COGS/Avg Inventory

Days to Sell Inventory = 365/Inventory turnover

Acct’s Receivable turnover = sales (credits)/ avg. accounts receivable

Receivable collection period = 365/accounts receivable turnover

Question 7

Profitability ratios (4)

Answer 7

Gross Profit margin = Gross profit/sales

operating profit margin = operating income/revenue

return on assets= EAT/total assets

Return on Equity = EAT/equity

Question 8

**Debt ratios (3)

Answer 8

Debt to equity= total long-term debt/equity

Times interest earned= EBIT/interest expense

Debt Ratio = total debt/total assets

Question 9

Emergency Fund Ratio

Answer 9

Emergency fund ratio = monetary assets/monthly living expenses

Target: 3-6+months

1 income = at least 6 months
2 income = at least 3 months

Question 10

Emergency Fund can include:

Answer 10

Must be liquid and marketable:

cash
checking and saving accounts
money market mutual funds
T-bills
CDs
Cash value life insurance
Lines of credit
Home equity loans

Question 11

What does FDIC stand for?

Answer 11

Federal Deposit Insurance Corporation

Question 12

What does the FDIC do?

Answer 12

independent agency created by Congress to maintain stability and public confidence in the nation’s financial system

applies to all clients who hold bank products in their savings and investment portfolios

Question 13

FDIC Deposit Insurance Coverage Limits

Answer 13

$250,000 PER OWNER…
Single Accounts - Owned by one Person - per owner
Joint Accounts - owned by 2+ persons - per co owner
Certain Retirement accounts - IRAs - per owner
Revocable Trusts - per owner per unique beneficiary
Corporation, partnership and Unincorporated assoc - per entity
Irrevocable Trusts - per noncontingent interest of each unique beneficiary
Employee benefit plans accounts - per noncontingent interest of each plan beneficiary
Government Accounts - per official

Question 14

What is something that is not insured by the FDIC?

Answer 14

Money market mutual fund (MF)

Question 15

Credit Protection Laws

Answer 15

Exist to support consumers on credit related matters

1. Consumer Credit Protection Act - right to know costs and terms of credit
2. Equal Credit Opportunity Act - right to fair opportunity to obtain credit, borrower must receive a response within 30 days after application
3. Fair credit reporting act - right to know what’s in your credit file
4. Fair Credit Billing Act - right to have billing mistakes resolved
5. Fair Debt Collection Practices Act - right to be protected from collection agencies
6. Truth in Lending Act - requires lenders to disclose the true cost of consumer credit, explaining all charges, terms and conditions. Consumer must be provided the total finance charge and APR

Question 16

Types of Bankruptcies

Answer 16

Chapter 7 - liquidation type, individuals & business, unsecure debt is eliminated - with exceptions
Chapter 13 - repayment type, individuals, pay back debt through plan
Chapter 11 - reorganization, pay back over time, business but can accommodates those who exceed chapter 13 limitations or lack of regular income

Question 17

Chapter 7 Bankruptcy

Answer 17

Most debts are discharged after 115 days from the date of filing for Chapter 7, but certain obligations must still be repaid:
child support,
alimony,
income taxes less than three years past due,
student loans, and
secured debt.

Question 18

Chapter 13 Bankruptcy

Answer 18

Under Chapter 13 a debtor will pay more every month to make payments on their overdue debt along with their current monthly payments.
To be eligible to file for Chapter 13 bankruptcy, an individual must have no more than $419,275 in unsecured debt, such as credit card bills or personal loans. They also can have no more than $1,257,850 in secured debts, which includes mortgages and car loans.

Question 19

Automatic Stay

Answer 19

is issued when you file for chapter 7 or 13 and it stops creditors from attempting to collect what is owed to them
Does not apply to alimony, child support or criminal suits

Question 20

Bankruptcy Overview

Answer 20

Question 21

Define Credit Score

Answer 21

tells lenders about a person’s creditworthiness - how likely they are to pay back a loan based on credit history

Question 22

FICO Scores calculations:

Answer 22

Pat Always Lets Nehemiah Catch

payment history (35%)
amounts owed (30%) - the amount one owes vs. credit available
length of credit history (15%)
new credit (10%)
credit mix (10%)

Question 23

FDIC Notes

Answer 23

Separate the ownership categories first

Note that for joint account interests for each owner’s joint account holdings are aggregated and that owner has $250k total at that bank for joint interests.

$2MM max protection if a person had the 8 different types of accounts.

Question 24

Debt resolution Rule

Answer 24

Financial planners use the debt resolution rule to help control debt obligations. These exclude borrowing associated with education and home financing.

The debt resolution rule forces you to repay all your outstanding debt obligations every 4 years.

Question 25

To assess a borrower’s ability to repay, lenders look at 3Cs

Answer 25

Character - how the borrow has handled themselves in previous financial dealings
Capacity - ability to repay debt - also looking at future commitments
Capital - financial strength, usually measured by net worth

Question 26

Long term debt coverage below X is not financially desirable

Answer 26

2.5

Question 27

three major components to the privacy requirements of the Gramm-Leach Bliley Financial Modernization Act of 1999 (GLB Act)

Answer 27

The Financial Privacy Rule: regulates how financial institutions may gather and subsequently disclose personal financial information to others. This rule also places restrictions on the use of information that companies receive from third parties, whether these companies are financial institutions or not.

The Safeguards Rule: requires financial institutions to create and implement procedures to protect the personal financial information they obtain from customers. This rule also applies to companies, such as credit bureaus, who receive this information directly from other financial institutions.

The Pretexting Provisions: protect individuals whose personal financial information has been obtained by others under false pretenses.

Question 28

Illiquid Assets

Answer 28

assets not available to meet income or other monetary needs because they are not easily liquidated